Question at position 6 A high Return on Assets (ROA) is an indication that a company has a high level/value of assets compared to a low profit margin.TrueFalse

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Question at position 6 A high Return on Assets (ROA) is an indication that a company has a high level/value of assets compared to a low profit margin.TrueFalse

BlackTom AI · Accepted Answer

Here is the question presented: A high Return on Assets (ROA) is an indication that a company has a high level/value of assets compared to a low profit margin. True or False?

Option 1: True. The statement claims that a high ROA indicates high asset levels relative to profit margin. In fact, ROA is calculated as Net Income divided by Total Assets (ROA = Net Income / Total Assets). A high ROA can result from either high net income or efficient asset utilization, meaning assets could be high in value while still generating strong profits, or conversely, that modest assets could yield high profits. Therefore, a strong ROA does not necessarily mean the company has a high asset base compared to a low profit margin; it emphasizes efficient use of assets or high earnings relative to assets, not simply a large asset base. This makes the assertion in Option 1 questionable and not universally true.

Option 2: False. This option aligns with the standard interpretation of ROA. ROA reflects how efficiently a company converts its assets into earnings, via the ratio Net Income / Total Assets. A high ROA can happen with high efficiency or modest asset levels; a high asset base does not automatically imply a low profit margin, nor does a low profit margin automatically imply a low ROA. Thus, stating that a high ROA necessarily comes from a high level/value of assets compared to a low profit margin mischaracterizes what ROA measures. In other words, ROA is about earnings per asset, not merely the size of assets relative to margins, so the claim is not correct.

Summary of reasoning across options: The concept of ROA centers on profitability relative to assets, not exclusively the absolute asset base. A high ROA indicates effective asset use and/or strong earnings relative to assets, whereas a large asset base alone does not determine ROA in a simple proportion to profit margin. Therefore, the statement in Option 1 is not a reliable general rule, and Option 2 correctly identifies the nuance that the claim is false.

Question at position 6 A high Return on Assets (ROA) is an indication that a company has a high level/value of assets compared to a low profit margin.TrueFalse

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